The South African Revenue Service (SARS) is planning a major revision of the way motor vehicle (or travel) allowances are taxed. The revision could not only result in you paying more tax on your travel allowance, but also paying the tax earlier.
Travel allowances have become an important part of the pay packets of many employees at middle and senior management level in recent years.
Employers often provide travel allowances as a ploy to reduce pensionable salaries rather than to compensate employees for using a motor vehicle for business purposes.
Neither employers nor SARS consider motor vehicle allowances to form part of an employee's pensionable salary. This means an employer does not have to make any contributions to your pension fund for the portion of your pay packet that comes in the form of a motor vehicle allowance. This clearly results in a huge saving for your employer.
However, it also means that many people have to take a major cut in income when they retire, because their retirement fund structure is based on receiving a pension that is a percentage of their final "pensionable" salary - normally between 60 and 75 percent.
For many employees, a travel allowance, which often comprises as much as one-third of their pay, is used to supplement their monthly budget rather than to pay for a motor vehicle.
When they retire, these people see their monthly income drop by more than 50 percent because they lose a portion of their "pensionable" income plus the vehicle allowance.
SARS is concerned about three issues affecting the way travel allow-ances are taxed:
1. Deferred tax
The advantages to be gained by deferring tax on motor vehicle allowances were reduced two years ago. Until then, tax on the full allowance was deferred until the end of the tax year and any portion on which tax was due only had to be paid on assessment.
But two years ago, SARS insisted that where a vehicle was not used for business purposes, 100 percent of the allowance had to be taxed at your marginal rate of taxation on payment of the allowance.
Where a vehicle was used for business purposes, 50 percent of the allowance had to be taxed at your marginal rate of taxation.
SARS is planning to revisit these rulings. It is likely that people who use their vehicles for business purposes will have to pay more tax when they receive the allowance rather than being allowed to defer the tax.
2. Residual value
Currently for tax purposes the value of your vehicle is written down to zero after five years. If you then sell the vehicle for any amount above zero, SARS makes a loss because you were able to claim the depreciation while you owned the vehicle and you pay no tax on the share of the depreciation you recover when you sell it.
The current structure particularly favours people who buy expensive cars, because they can claim proportionally more in writing down the value of their vehicles and then pick up the benefit of a high resale price.
Now, SARS is looking at ways to get a proportional share of the amount for which you sell the vehicle.
3. Deemed mileage
SARS allows taxpayers who have not kept accurate records of the kilometres travelled for business purposes to deem the distances involved when claiming their tax rebate.
In Budget documents, SARS says the number of taxpayers using the deemed expense schedule has increased significantly over the past few years. This is because SARS - by its own admission - has over-estimated the kilometres deemed to be business travel, which "in effect means that many taxpayers are able to deduct amounts that are effectively private expenses".
SARS says the deemed schedule is to be reviewed "to explore appropriateness of the deemed private and business kilometres travelled".
Ad valorem tax
This year's Budget also contains a vague but unexplained threat that SARS will reassess the ad valorem tax structure for motor vehicles. Ad valorem tax is effectively a tax on luxuries that is added to many items, including motor vehicles.
The indications are that the tax will almost definitely be increased on more expensive vehicles, particularly imported models, but may decrease on cheaper vehicles.
You can expect the changes to be unveiled in next year's Budget.